9/24/2019 World’s first 30-year bond with zero coupon flops in Germany - The Economic Times

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World’s first 30-year bond with zero coupon flops in

Germany
BY BLOOMBERG | AUG 22, 2019, 09.45 AM IST Post a Comment

London: The world’s first 30-year bond offering a zero coupon struggled to find buyers,
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signalling that negative yields across Europe may finally be taking their toll on investor
demand. BNP Paribas

Germany failed to meet its 2-billion-euro target ($2.2 billion) for the auction of notes Big Change:
maturing in 2050, selling only 824 million euros. It’s another sign that the global bond rally The end of Five-Year Plans: All you need to know

may be coming to a halt now that more than $16 trillion of securities around the world
have negative yields. “The broader conclusion is that this is an ominous sign for cash
bonds,” said Antoine Bouvet, a rates strategist at ING Groep NV, looking ahead to the end
of a summer lull in European issuance next month. The jury is still out on whether this is “a turning point in the long-end rates rally, as
the fundamental driver of lack of faith in central banks’ ability to reflate the economy is still there.”

Dwindling expectations for inflation and growth in coming years has led the European Central Bank to hint at a new wave of monetary
stimulus next month, driving a rally across the region’s bond markets. The whole of Germany’s yield curve is now below zero — the first
major market exhibiting such a trait — meaning the government is effectively being paid to borrow out to 30 years.

The sale comes as Germany is priming the pumps for extra spending should an economic crisis hit. While the nation is confined to strict
laws on running a fiscal deficit, finance minister Olaf Scholz suggested Germany could muster 50 billion euros ($55 billion) should a
recession hit. The economy contracted in the second quarter.

The auction was at a record-low average yield of -0.11 per cent, while the Bundesbank retained nearly twothirds of the debt on offer. The
real subscription rate -- a gauge of demand that accounts for retentions by the Bundesbank — fell to 0.43 times against 0.86 times at the
previous sale of similar maturity bonds on July 17.

“This shows that there is less demand for 30-year bonds at negative yields,”
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said Marco Meijer, a senior fixed-income strategist at BNP Paribas SA. Still, Meijer doesn’t “see yields rising a lot in Europe.” German
30-year yields rose three basis points to -0.12 per cent as of 2:30 pm in London. Those on 10-year securities climbed two basis points to
-0.67 per cent.

One of the triggers for a German bond selloff in 2015, after benchmark yields first neared 0 per cent, was a poor 10-year auction that
highlighted a loss of demand at low yield levels. This time around, Commerzbank AG had expected demand to come from life insurers
and macro investors, despite the yield curve flattening in recent weeks to drive down long-dated yields. German 30-year bonds are still
attractive for US investors, when hedged for currency swings, offering around a 2.6 per cent yield, relative to around 2 per cent on a 30-
year Treasury.

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